Edexcel GCSE Business
Break Even
Today’s Learning Objectives
• Understand the principal of break-even.
• Appreciate how to draw and interpret breakeven charts.
• Understand how to calculate the break-even
point and the margin of safety.
Which businesses use break-even?
• Chelsea F.C. will use breakeven analysis using:
• Total Revenue such as shirt
sales, ticket sales &
sponsorship.
• Total Costs such as player
wages, transfers, stadium
maintenance.
• Topshop will use breakeven analysis using:
• Total Revenue such as
dress, bag and shoe sales.
• Total Costs such as staff
wages and rent!
Break Even
What is it?
Which formulae do we need?
Definition Alert!!
‘It is the level of output where revenues just
equal costs’
Total Revenue = Quantity Sold x Average Price
Total Variable Costs = Quantity Sold x Variable Cost
Total Costs = Fixed Costs + Variable Costs
Return to
questions!
Create your BE table...
How many have
you sold?
How much revenue
do you make based
on this many sales?
Total Fixed Costs
(This stays the
same
throughout!)
What are the
Total Variable
Costs?
How much
profit/loss have
you made?
What are
your Total
Costs?
The 5 point process to building a
break even chart!
Stage 1 – Create your graph!
• Create two axis on a graph
and label them with sales
and revenue (use relevant
figures!)
For example....
Label
Revenue on
the y-axis
Label Sales
on the x-axis
The 5 point process to building a break
even chart!
Stage 2 – Insert your revenue line!
For example....
• Can you remember the
equation we need for
REVENUE?
Find equations!
Insert your
revenue line
REMEMBER:
THE REVENUE LINE
STARTS FROM 0!
The 5 point process to building a break
even chart!
Stage 3 – your Fixed Costs!
For example....
• At this point you should have
created you total costs table!
• What were the two equations
we needed for costs?
Find equations!
Now draw on your fixed costs –
this line is always flat!
REMEMBER F for FLAT!
Fixed
costs of
£120,000
The 5 point process to building a break
even chart!
Stage 4 – Your Variable Costs!
Now draw on your variable
costs!
For example....
Variable
cost line –
also called
total
costs!
The 5 point process to building a break
even chart!
Break-Even Point!
Hurrah!
Stage 5 – Find Your Break Even Point!
• Where the Total Revenue
line crosses the Total Costs
line is the Break Even Point!
• You can calculate the
amount of sales you need to
make by drawing a line
down to the x axis!
For example....
Now it’s your turn...
• You work for Chelsea Football Club, and they have asked you
to carry out a break even analysis based on shirt sales!
• You will need to calculate how many shirts the club needs to
sell to reach their break-even point this season!
• Once you have completed the figures in the table, create your
BE chart on graph paper!
Did you know? When David Beckham signed for LA Galaxy, he had sold over
250,000 shirts before he had even arrived at the club!
Forget to buy your own shirt David?
Chelsea Predicted Financial Information for 2011-2012:
Need the
equations
again?
Click here!
Fixed Costs £5 million
Variable Cost per shirt £5
Shirt Price £40
Shirt
Sales
Total
Revenue
(£
millions)
Total
Fixed
Costs (£
millions)
Total
Total
Profit &
Variable Costs (£ Loss (£
Costs (£ millions) millions)
millions)
100,000
200,000
300,000
400,000
500,000
Finished the table? Start drawing your BE graph!!
Table
Answers
Chelsea Predicted Financial Information for 2011-2012:
Fixed Costs £5 million
Variable Cost per shirt £5
Shirt Price £40
Shirt
Sales
Total
Revenue
(£
millions)
Total
Fixed
Costs (£
millions)
Total
Variable
Costs (£
millions)
Total
Costs (£
millions)
Profit &
Loss (£
millions)
100,000
4
10
0.5
10.5
(6.5)
200,000
8
10
1
11
(3)
300,000
12
10
1.5
11.5
0.5
400,000
16
10
2.0
12.0
4
500,000
20
10
2.5
12.5
7.5
Feeling confident?
• I will choose five people to contribute to the
break-even graph on the board.
• There are roles for the following aspects:
1. Drawing the axis
2. Drawing the Revenue
3. Drawing the Fixed Costs
4. Drawing the Variable Costs
5. Finding the Break-Even Point
How did you get on with the graph? Remember to show your working when doing your calculations!
What is the Margin of Safety?
Definition Alert!!
MARGIN OF SAFETY = ACTUAL PRODUCTION LEVEL – BREAK-EVEN PRODUCTION LEVEL
If the level of shirt sales was actually 350,000 shirts, what is
the Margin of Safety for Chelsea?